Joyner Company’s income statement for Year 2 follows: Sales $ 702,000 Cost of goods sold 96,000 Gross margin 606,000 Selling and administrative expenses 151,100 Net operating income 454,900 Nonoperating items: Gain on sale of equipment 6,000 Income before taxes 460,900 Income taxes 138,270 Net income $ 322,630 Its balance sheet amounts at the end of Years 1 and 2 are as follows: Year 2 Year 1 Assets Cash $ 298,230 $ 66,500 Accounts receivable 229,000 123,000 Inventory 320,000 288,000 Prepaid expenses 9,000 18,000 Total current assets 856,230 495,500 Property, plant, and equipment 639,000 508,000 Less accumulated depreciation 165,100 130,100 Net property, plant, and equipment 473,900 377,900 Loan to Hymans Company 43,000 0 Total assets $ 1,373,130 $ 873,400 Liabilities and Stockholders' Equity Accounts payable $ 314,000 $ 257,000 Accrued liabilities 44,000 50,000 Income taxes payable 86,000 81,400 Total current liabilities 444,000 388,400 Bonds payable 200,000 114,000 Total liabilities 644,000 502,400 Common stock 341,000 273,000 Retained earnings 388,130 98,000 Total stockholders' equity 729,130 371,000 Total liabilities and stockholders' equity $ 1,373,130 $ 873,400 Equipment that had cost $30,900 and on which there was accumulated depreciation of $10,600 was sold during Year 2 for $26,300. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock. Required: 1. Using the indirect method, compute the net cash provided by/used in operating activities for Year 2. 2. Prepare a statement of cash flows for Year 2. 3. Compute the free cash flow for Year 2.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Joyner Company’s income statement for Year 2 follows:
| Sales | $ 702,000 |
|---|---|
| Cost of goods sold | 96,000 |
| Gross margin | 606,000 |
| Selling and administrative expenses | 151,100 |
| Net operating income | 454,900 |
| Nonoperating items: | |
| Gain on sale of equipment | 6,000 |
| Income before taxes | 460,900 |
| Income taxes | 138,270 |
| Net income | $ 322,630 |
Its balance sheet amounts at the end of Years 1 and 2 are as follows:
| Year 2 | Year 1 | |
|---|---|---|
| Assets | ||
| Cash | $ 298,230 | $ 66,500 |
| Accounts receivable | 229,000 | 123,000 |
| Inventory | 320,000 | 288,000 |
| Prepaid expenses | 9,000 | 18,000 |
| Total current assets | 856,230 | 495,500 |
| Property, plant, and equipment | 639,000 | 508,000 |
| Less |
165,100 | 130,100 |
| Net property, plant, and equipment | 473,900 | 377,900 |
| Loan to Hymans Company | 43,000 | 0 |
| Total assets | $ 1,373,130 | $ 873,400 |
| Liabilities and |
||
| Accounts payable | $ 314,000 | $ 257,000 |
| Accrued liabilities | 44,000 | 50,000 |
| Income taxes payable | 86,000 | 81,400 |
| Total current liabilities | 444,000 | 388,400 |
| Bonds payable | 200,000 | 114,000 |
| Total liabilities | 644,000 | 502,400 |
| Common stock | 341,000 | 273,000 |
| 388,130 | 98,000 | |
| Total stockholders' equity | 729,130 | 371,000 |
| Total liabilities and stockholders' equity | $ 1,373,130 | $ 873,400 |
Equipment that had cost $30,900 and on which there was accumulated depreciation of $10,600 was sold during Year 2 for $26,300. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock.
Required:
1. Using the indirect method, compute the net cash provided by/used in operating activities for Year 2.
2. Prepare a statement of
3. Compute the
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